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infinitee00
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Couldn't find a thread on LinkedIn so decided to create one.

 

Barron's published an article this week questioning LinkedIn's valuation. Even though there's not much new for those that have followed LinkedIn for a while, I thought I'd post the link and highlight the egregious abuse of stock based compensation at some of the high-flying social media companies.

 

When stock-based compensation is almost your entire EBITDA, I am not sure non-GAAP earnings matter !

 

 

Valuing LinkedIn

 

Valuing LinkedIn

 

After the recent selloff in social-media stocks, sky-high valuations have fallen for many. That doesn't mean they're cheap.

 

At $158.17, shares of LinkedIn (ticker: LNKD), the professional-networking Website, are down 37% from highs. Though it fell 10% last week, it is well liked by investors, with no Sell ratings from Wall Street brokers. Yet the shares remain overvalued by conventional measures, which bulls eschew for the company's own adjusted results.

 

For example, in addition to results based on Generally Accepted Accounting Principles, the firm likes to present its adjusted earnings before interest, taxes, depreciation, and amortization (Ebitda). This is a non-GAAP figure that leaves out stock-based compensation—which is common among tech companies—among other items.

 

In 2013, net revenue grew 57% to $1.5 billion. Adjusted Ebitda soared 69% to $376 million and non-GAAP net income rose to $192 million, or $1.61 per share, from $100 million, or 89 cents, in 2012. That seems good but leaves out a hefty $194 million in stock-based compensation. LinkedIn is guiding for a 2014 adjusted Ebitda of $490 million, 30% higher. Yet the adjusted Ebitda growth rate is down by half, and that leaves out an even bigger $325 million in estimated stock compensation this year.

 

Using consensus estimates for LinkedIn's adjusted non-GAAP 2014 EPS of $1.57 results in a still high price/earnings ratio of 100 times. That's three times the growth rate, which happens to be slowing sharply from 2013. It's difficult now to see LinkedIn as a super-growth story and deserving of a triple-digit P/E multiple, even based on more-flattering adjusted figures.

 

Though not paid out as a cash expense, stock compensation needs to be taken into account in the multiple. When it is, the picture appears much less attractive. LinkedIn's 2013 GAAP net income was $27 million, or 23 cents per share, up 21% from $22 million, or 19 cents per share, in 2012. The trailing P/E is 687 times. Taxes fell sharply but had they been similar to 2012's level, GAAP net income would have fallen last year.

 

Moreover, LinkedIn's costs are rising as fast as its revenue, faster in the case of general and administrative costs, up 76% in 2013 versus a 71% rise in 2012. LinkedIn's net-income margin was 2% last year, roughly what's seen at a supermarket.

 

LinkedIn's valuation embeds significant future profit growth, so slowing growth should be of great concern to investors, says David Trainer, president of New Constructs, a Brentwood, Tenn.-based independent research outfit. The company hasn't been able to translate its revenue growth into strong profit growth, and return on invested capital was cut in half last year, to 4% from 8%, adds Trainer, who is short the stock.

 

He points out that many LinkedIn metrics, though at high levels absolutely, are going the wrong way. Growth in revenue, membership, unique visitors, and page views is slowing, notably so in some cases. (See table.) Even the adjusted consensus 2014 EPS estimate has come down, now $1.55, versus $2.22 earlier this year.

 

Enlarge Image

 

Let's compare LinkedIn with Facebook, which also uses GAAP and non-GAAP measures. Facebook saw 2013 revenue grow 55%, about the same as LinkedIn. But the Menlo Park, Calif.-based social-media company raised GAAP earnings sharply to $1.5 billion, or 60 cents, from $53 million, or one cent.

 

Facebook has much higher margins and sports faster-growing GAAP and non-GAAP net income, but it trades at significantly lower valuations: a P/E of 54 times 2014 GAAP EPS consensus of $1.06 and 41 times expectations of $1.41 in adjusted non-GAAP EPS, which also excludes compensation.

 

LinkedIn didn't respond to a request for comment. Its growth rate is at a level that most companies could only wish for. Unfortunately, the high stock valuation discounts growth accelerating even as it's decelerating.

 

Disclosure - I am short LNKD through puts.

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Thanks infinitee00. I had some put contracts on linkedin but sold them at a small profit some time ago as expiration date came close. Oeps!

But currently valued at $19B, it would be a mistake to think that you are to late to the party to short now. Earnings on thursday could be interesting, especially after seeing the lackluster reaction on FB's earnings.

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Thanks infinitee00. I had some put contracts on linkedin but sold them at a small profit some time ago as expiration date came close. Oeps!

But currently valued at $19B, it would be a mistake to think that you are to late to the party to short now. Earnings on thursday could be interesting, especially after seeing the lackluster reaction on FB's earnings.

 

Like Einhorn, I took the basket approach with my shorts of high momentum tech companies, except that I have been short these high momentum names since late last year/early this year (mostly through puts, except for one or two ) when it seemed like revenue growth may be slowing down for these companies, and valuations seemed so absurd that I just couldn't help myself.

 

It has been a roller coaster ride with my account swinging from black to red and again to black within very short periods of time and I fully understand that I could lose all my bets if this silliness continues for long ( Maynard Keynes's quote always serves as a reminder) !!

 

 

 

 

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  • 2 years later...
This combination will make it possible for new experiences such as a LinkedIn newsfeed that serves up articles based on the project you are working on and Office suggesting an expert to connect with via LinkedIn to help with a task you’re trying to complete.

 

This is the strategic rationale for a $26B deal?

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If LNKD can be run as a utility, with headcount and stock-comp all slashed by more than 50%, then MSFT got itself a decent deal.

 

LNKD is a terrific business. But I always scratched my head trying to work out why the business was being run with so many staff, and why that staff was so highly compensated.

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Wow. I had pegged Satya Nadella as a smart operator. After this, I am not so sure. Ballmer managed to vapourize $10bn of Microsoft cash buying Nokia - this deal could run that pretty close. The justification for the merger seems especially spurious - apparently Linkedin will compliment Microsoft Office well. How does enterprise software and online recruitment/networking mesh?

 

If you were feeling speculative, then I could easily see someone taking out Twitter at a substantial premium to current price.

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This seems like a very interesting deal.

 

1) Microsoft purchased the most valuable social graph of the business work

2) Integration with Office365/Dynamics/LinkedIn is a very formidable SalesForce competitor

3) Seem like LinkedIn has a ton of untapped potential.  They're pegged as a recruiter tool (look at this thread) but there is SO much you can do with it.  I've used it for sales lead gen and direct mail in the past.  If there were better tools I'd happily pay monthly for this.  At one point I was paying $70 or so a month for Premium.

 

If you run a business there are a LOT of things that LinkedIn is great for.  I think everyone is discounting its use for sales, I've found it invaluable for sales.  The ability to look up people, look up positions, connections, reverse engineer email addresses etc.

 

Here's something that's not very well known.  If you cold email an exec you have a very small chance of ever hearing a response back.  If you cold InMail an exec there is a very high chance of a response.  No idea on the reason why, but it works.

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Here's something that's not very well known.  If you cold email an exec you have a very small chance of ever hearing a response back.  If you cold InMail an exec there is a very high chance of a response.  No idea on the reason why, but it works.

 

I think their inmail inbox doesn't have many messages.

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Here's something that's not very well known.  If you cold email an exec you have a very small chance of ever hearing a response back.  If you cold InMail an exec there is a very high chance of a response.  No idea on the reason why, but it works.

 

I think their inmail inbox doesn't have many messages.

 

I think there's also the scarcity factor.  A typical subscription includes 15 messages a month.  A recruiter account 30 a month.  There is a high cost associated with them whereas email is throw away.

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  • 4 months later...

LNKD has sold off recently (from $193 to $190.5) and is now representing a very interesting risk-arb situation.  MSFT is buying LNKD for $196 per share, with a deal likely getting closed by year-end.  Right now, you are looking at a ~2.9% arb spread into the deal…which equates to an IRR of around ~12%, if you assume the deal gets done by December. 

It’s interesting for tax-deferred accounts (like a ROTH IRA), or with some leverage in a PA to boost returns going into yearend.  Obviously there is risk, but most analysts agree the transaction makes a lot of sense for MSFT…particularly from a data/office side. 

 

Worth thinking about given the recent 'weakness' in LNKD

 

(note: I am long and started a position today)

 

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LNKD has sold off recently (from $193 to $190.5) and is now representing a very interesting risk-arb situation.  MSFT is buying LNKD for $196 per share, with a deal likely getting closed by year-end.  Right now, you are looking at a ~2.9% arb spread into the deal…which equates to an IRR of around ~14%, if you assume the deal gets done by December. 

It’s interesting for tax-deferred accounts (like a ROTH IRA), or with some leverage in a PA to boost returns going into yearend.  Obviously there is risk, but most analysts agree the transaction makes a lot of sense for MSFT…particularly from a data/office side. 

 

Worth thinking about given the recent 'weakness' in LNKD

 

(note: I am long and started a position today)

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